Saturday, May 15, 2021

Deficit funding can be harmful to economy- Dr Tabengwa

While many commentators have scolded government for being obsessed with running a surplus or balanced budget, a leading researcher at government think tank, Botswana Institute for Development Policy Analysis, has differed.

Dr Grace Tabengwa Ag. Senior Research Fellow and Macroeconomist at BIDPA says deficit funding is not always a good thing as it can affect the country’s credit rating in the long run and is of the view the economy cannot run on perennial deficits.

Speaking at Afena Capital Press Club meeting at Gaborone Sun on Monday, Tabengwa argued that with other sectors of the economy not performing to the same levels as mining, this leads to treasury tapping into the foreign reserves.

“Fundamentals do not allow deficit funding for a long time. We need to save,” she argued. She gave an example of many African countries that became highly indebted and their economies collapsing.

With the non-mining sector not at par with exports of diamonds, the government could be forced to tap into foreign reserves as it happened during the 2008 recession. This led to foreign reserves declining from P70 billion to P50 billion and Tabengwa warned that if this scenario continued, it could be a different story.

Critics argue that government should run a deficit funding in order to keep the economy at par with those of the developed world. Botswana ran a fiscal deficit in 2010/11 financial year before it was contained with a balanced budget in 2012/ 13 financial year.

The deficit for 2008/09 was P4.696 billion and during 2009/10 it stood at P9.321 billion and the one for 2010/11 was projected at P12.12 billion.

Forecasts show that Minister of Finance and Development Planning, Kenneth Matambo, will announce a moderate surplus of P1.3 billion when he presents 2015/2016 financial year next Monday. “The budget will still be tight,” stated Tabengwa.

Tabengwa told the briefing that the budget will not see any announcement of new projects as the priority will be to maintain existing ones and complete problematic projects like Morupule B. She also foresees a lion share of resource allocation going to traditional culprit ministries including Ministry of Health, Defence and Transport.
“I do not see that happening (new projects). I expect to see government maintaining existing infrastructure”.

The United States is one country that runs deficits in order to finance its large and sophisticated economy.
According to the United States Congressional Budget Office, between 2015 and 2024, annual budget shortfalls are projected to rise substantiallyÔÇöfrom a low of $469 billion in 2015 to about $1 trillion from 2022 through 2024ÔÇömainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.

It said cumulative deficits during that decade will equal $7.6 trillion if current laws remain unchanged. As a share of GDP, deficits are projected to rise from 2.6 percent in 2015 to about 4 percent near the end of the 10-year period. By comparison, the deficit averaged 3.1 percent of GDP over the past 40 years and 2.3 percent in the 40 years before fiscal year 2008, when the most recent recession began. From 2015 through 2024, both revenues and outlays are projected to be greater than their 40-year averages as a percentage of GDP.

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